Economics 101 : Price Controls

Economics 101 : is a new series brought to you by local Independent Investment Representative James J FoytlinHorwitz & Associates54 Washington PlaceRidgewood NJ 07450toll free 1(866)492-3959phone 1(201)301-2780cell 1(201)966-7788http://onesmallvoice.blogspot.com/excerpts from BASIC ECONOMICS: A Citizen’s Guide to the Economyby Thomas Sowell

Chapter 3, “Price Controls”To understand the effects of price control, it is necessary to understand how prices rise and fall in a free market. There is nothing esoteric about it, but it is important to be very clear about what happens. Prices rise because the amount demanded exceeds the amount supplied at existing prices. Prices fall because the amount supplied exceeds the amount demanded at existing prices. The first case is called a “shortage” and the second is called a “surplus”–but both depend on existing prices.

Simple as this might seem, it is often misunderstood–sometimes with disastrous consequences. A closer examination shows why shortages persist when the government sets a maximum price lower than what it would be in a free market and why a surplus persists when the government sets minimum prices for farm products higher than these prices would be in a free market.

PRICE CEILINGS AND SHORTAGES

When there is a “shortage” of a product, there is not necessarily any less of it, either absolutely or relative to the number of consumers. During and immediately after the Second World War, for example, there was a very serious housing shortage in the United States, even though the population and the housing supply had both increased about 10 percent from their prewar levels and there was no shortage when the war began.

In other words, even though the ratio between housing and people had not changed, nevertheless many Americans looking for an apartment during this period had to spend weeks or months in an often vain search for a place to live, or else resorted to bribes to get landlords to move them to the top of waiting lists. Meanwhile, they doubled up with relatives, slept in garages or used other makeshift living arrangements.

Although there was no less housing space per person than before, the shortage was very real at existing prices, which were kept artificially lower than they would have been because of rent control laws that had been passed during the war. At these artificially low prices, more people had a demand for more housing space than before rent control laws were enacted. This is a practical consequence of the simple economic principle already noted in Chapter 2 that the quantity demanded varies with how high or low the price is.

Some people who would normally not be renting their own apartments, such as young adults still living with their parents or some single or widowed elderly people living with relatives, were enabled by the artificially low prices created by rent control to move out and into their own apartments. These artificially low prices also caused others to seek larger apartments than they would ordinarily be living in. More tenants seeking both more apartments and larger apartments created a shortage, not any greater physical scarcity of housing relative to the population. When rent control laws expired or were repealed, the housing shortage likewise quickly disappeared.

As rents rose in a free market, some childless couples living in four-bedroom apartments decided that they could live in two-bedroom apartments. Some late teenagers decided that they could continue living with mom and dad a little longer, until their pay rose enough for them to afford their own apartments, now that apartments were no longer artificially cheap. The net result was that families looking for a place to stay found more places available, now that rent-control laws were no longer keeping such places occupied by people with less urgent requirements.

None of this was peculiar to the United States. The same economic principles can be seen in operation around the world and down through history.—

——————————————————————————–— excerpted from Chapter 3 of BASIC ECONOMICS: A Citizen’s Guide to the Economy by Thomas Sowell.Find the book here: http://FreedomKeys.com/bkecon.htm